Tagpersonal debt level

But why? Why does the govt believe there is a need for all this change? That’s the question most industry insiders are asking. Here are some facts with my thoughts mixed in…. tell me if you see some contradiction between the different branches of the govt or a lack of consistency:

Surprise…we don’t have a mortgage default problem… Mortgage arrears in Canada are 0.38% as of January 2012. In Ontario, the housing hot spot, arrears are only 0.28%. These figures are very low by anyone’s standards.

The average resale price dropped 0.5% nationally. But resale prices in Toronto, are up around 7.3% in a year-over-year comparison. But that trend is cooling according to The Canadian Real Estate Association.

Inflation isn’t a problem… it’s hovering at 1.9%, well within acceptable levels.

Housing affordability hasn’t really changed in 10 yrs according to the RBC housing affordability index and it actually improved in Q4 of 2011 (it’s probably even better this year as interest rates are even lower).

Personal household debt is around 153% of income. That’s a record high number, it’s true, but what are Canadians borrowing for? Studies tell us it’s not for big screen TVs or trips to Bahamas… We’re actually investing… in stocks, mutual funds, real estate here and in the U.S. In fact, we are the biggest foreign buyers in Florida and we are also buying in Phoenix, Arizona in record numbers…. Is buying a second home a bad investment?

Did you know that 1/3rd of Personal Debt is non-mortgage debt including high interest credit cards, loans and unsecured lines of credit…. yet, there is little to no regulation for these products…

Speaking of credit cards… the arrears rate is just over 1.00%... that’s around triple what mortgage arrears are! Why isn’t the govt clamping down on these credit products?

Record-low interest rates were brought in to stimulate the economy. Haven’t Canadians played their role to kick-start the economy? Why does the govt want to punish homeowners now with tougher qualifying rules? OSFI has even proposed you re-qualify for your mortgage at renewal time!! How absurd is that?

The Bank of Canada wants to raise rates to slow our personal debt growth… but can’t for fear of slowing the economy…

The Federal Minister of Finance, Flaherty, wants to tighten mortgage lending to slow the housing market and reduce the amount of mortgage debt we take on.

The housing market accounts for up to 40% of this country’s GDP… all these changes will affect our economy.

Business for Self mortgage programs have been eliminated by some banks and other Lenders… making borrowing more expensive for this segment of our population…. by the way, they are paying their mortgages just fine.. there is no evidence suggesting Business for Self borrowers have repayment problems…

CMHC opted out of rental property mortgages last year in an attempt to slow real estate investment… so you must come up with 20% down or use equity from other sources for the down payment..

FED GOVT’S LATEST MOVE IS TO PUSH CMHC UNDER OSFI CONTROL

OSFI will assume control over CMHC, the country’s national housing agency…. You will have an audit dept overseeing a social program… hmm, I wonder what will happen to CMHC?? The possibilities frighten me and should frighten most Canadians… (more on this later).

Minister Flaherty made a comment that maybe the govt should consider selling CMHC… say goodbye to a business that nets over $1billion a year.. $16billion since 2002. Here’s an idea…why not split CMHC into 2 business… bulk insurance business and the traditional low down payment business… wouldn’t that keep the Canadian dream of home ownership alive and also satisfy the auditors, like OSFI??

OSFI wants to limit Secured Lines of Credit to 65% loan to value from today’s 80% loan to value… This one makes no sense and has received harsh criticism from Financial Experts…. scares me to think that it’s even gone from thought to paper to print… what other changes were they considering that didn’t make it to print??

MY SUMMARY OF IT ALL…

In short, the govt wants to keep the economy stable but they are going to make it harder for you and I to qualify for a mortgage…. Yet, there are no changes coming for the most expensive of debts… Credit cards, loans and unsecured lines of credit rules either don’t exist or will not change… For some reason, the govt thinks it’s okay to borrow at 7% , 8% for unsecured lines of credit and pay 18% to 20% on credit cards, but please don’t borrow for a home, at 3% and 4%??

If we continue to make it harder for Canadians to get a mortgage, then we will have fewer home sales.. Fewer home sales will affect ALL HOME VALUES and slow the economy. It’s really that simple… this affects the biggest asset that most of us will own… our home!

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The Bank of Canada met on Tuesday for the 3rd of eight scheduled meetings this year to set the Bank of Canada rate. As expected, no rate change… But there were some language in the meeting that suggests we could start to see rates go up as early as this year…. here’s an article from The Star and reaction from TD’s Economist.

In short, it appears and I stress the word, appears, as though Mr. Carney is warning us that interest rates will be rising sometime soon. But Economists aren’t buying into that warning just yet. There is still too much uncertainly about the global, U.S. and domestic economies. And as long as these concerns persist, then interest rates should remain low.

SOME EXPERTS DON’T BELIEVE ALL THE DOOM AND GLOOM STORIES

It’s true, we have experienced emergency interest rates for over 3 years now… It’s no secret the govt is concerned about Canadians get into too much debt. You’ve heard the figures. The average Canadians owes around 153% of their annual income…. concerns about a housing bubble. But how does that compare with the rest of the world? Here’s an interesting article from the Financial Post’s Andrew Coyne, which says there are other countries that carry 200% and 300% of their annual income in personal debt… there doesn’t seem to be the level of concern about their economies. So why are we in such a panic?

It appears we are at a point where rates could go up but a lot of things would have to fall into place before that happens… it could take 6, 9 months or even a few years before that happens… maybe longer…? Any rate increase is sure to be slow…. Don’t panic… if you see an opportunity where you can benefit from these low rates, then act on it… don’t let the media scare you into inaction or lack of action…..

And as always, speak with a professional that can discuss and explain the different mortgage products and trends… make an informed choice.

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So which report do you want to believe….? 2 separate reports… both from April 10, 2012. We have Reuter’s reporting that Canada’s Finance Minister Flaherty, isn’t making any changes to mortgage rules…. Click here for their report. Here’s a quote from the article “I have no present plans to intervene in the housing market in Canada,” Flaherty told reporters in New York.

And here’s another report from Bloomberg.com entitled “Flaherty Says He’s Planning Changes on CMHC Rules.” Click here for their report. Are you confused yet? Well, you’re not alone. The mixed messages are everywhere today. Bank of Canada Carney warning about record high Personal Debt Levels…. you’ve seen this one, I’m sure. We have too much personal debt… and then another report says Canadians are ready to tackle their debt level… and yet another one that say the economy is very fragile and is at risk of slowing down…

It’s hard to know which report is correct. One thing is certain… today’s mortgage rates are at historical lows. The govt and the BANKS don’t want them to last. If you have a house and some debt, or if you are considering buying a house, then why wouldn’t you take advantage of these low rates…? I’m NOT saying to go out and borrow more money for a TV or new car or other luxury items… If you have high interest debt, or higher interest debt than today’s 3.00%+ interest rates, then take action and restructure your finances… Today’s record low rates won’t last… You can still benefit from these historically low interest rates.

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It’s March, 2012. How will you look back at this month in 5 years time? There are certain dates in history that stand out for all of us. Some are more personal than others, like the birth of my son, the day I met my wife, my first trip overseas, NHL pro hockey camp, etc.

And then there are dates where I look back at missed opportunities.

-October 1984, I had a chance to buy a waterfront lot on Balsam Lake in Ontario’s cottage country, for $22,000…. now selling for $400,000. There was a new condo in east Toronto for $82,000 in September 1987…. now selling for $392,000….(and yes, I think I was 5 years old…Lol!)..

-Or how about that semi-detached house at Danforth Ave and Woodbine, in Toronto, for $175,000 in 1990….now selling for $500,000. More recently, I could have bought a house for $320,000 in 2005, near the water in Burlington, Ontario…..that same house sold for $800,000 last year.

The point it, I think we will look back at March 2012 as the month when the Banks declared mortgage war against each other… Only in this war, there is a winner… YOU, the consumer, YOU the borrower, YOU the investor. We are seeing record low mortgage rates. And they won’t last forever. In fact, this mortgage war is probably going to accelerate interest rate hikes… almost like starting a campfire with gasoline soaked wood… It’s burning red hot but it won’t last for long.

With interest rates are record lows, isn’t this the time to borrow? A $300,000 mortgage will carry for $1196/mth.. and that’s with a 5 year fixed rate term. Bond yields are climbing… 5 yr bond yields are up to 1.71%.. that’s up 30bps in less than a month… 5 year fixed rates follow bond movement… i think it’s safe to say, we should expect rates to climb in the near future… and the reason they haven’t moved yet is because of the Mortgage wars…

We are hearing the cries by the govt and some bankers, telling us not to borrow too much. Personal Debt level concerns are plastered all over the internet and media. But we aren’t seeing many articles telling us how to borrow and invest wisely…. borrow when rates are low instead of borrowing when rates are high… borrow when you qualify instead of borrowing when you don’t… borrow when you don’t need the money… Isn’t that when Banks want to lend you the money?

We have just seen a draft guideline, Bill B-20, entered in for review with a May 1st decision date. These new regulations are aimed at tightening lending rules even further.. and this time it’s targeting Home Equity Lines of Credit.. That’s right, they want to make it even harder to qualify for these products and possibly make the repayment terms more strict…

Opportunity is knocking… answer the door..

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$600billion….Recently, we heard that there was another crisis looming in the mortgage industry. Last week, we saw CIBC make headlines when their wholesale lending division, Firstline Mortgages, made drastic changes to the lending policies, which included pulling out of the self-employment and new-immigrant lending programs. They also reduced their maximum mortgage limits.

So what happened? Why did Firstline Mortgages make these changes? Firstline told us this was in reaction to a report stating Canada’s self-employed and new-immigrant mortgages shared similarities with the U.S. Subprime mortgages. But maybe there was another reason… Shortly after this report, we got news that CMHC was approaching their mortgage limit. The report said CMHC ‘s total insured portfolio was $541billion as of the end of Sept 2011. The last increase was in 2008 when the govt raised the limit from $450billion to $600billion. But now it remains uncertain if or when the govt will raise that limit… So now we have lenders and bankers wondering how this will affect the supply of mortgage insurance.. so, what do they do? They cut out some of the less popular mortgage programs… Nice, huh?

$250billion….But we are forgetting the private mortgage insurers. Genworth Financial has stated they have plenty of capacity before they reach their govt approved $250billion limit (this limit is expected to increase to $300billion in a few months). The only challenge for private insurers like Genworth, is that the govt only guarantees up 90% of it’s insurance to the lenders…. but 100% for CMHC . This could case lenders to seek higher returns on their mortgages, meaning potentially higher interest rates…

2.99%….Remember that 2.99% No Frills rate special last month? I can’t help but wonder what the executive boardroom was like when they saw their mortgage department come out with this rate… at a time when the govt was clearly trying to cool the housing market and slow consumer borrowing… It’s early in the year, but this has to go down as one of the most ill-timed moves of 2012… Congrats BMO mortgage dept! You did bring No Frills products to the forefront. And this gave us a real opportunity to point out the shortcomings of this product..

$1.5trillion…Last years, we heard that personal debts levels had hit record highs. Numerous articles and reports are telling us that we are borrowing too much. Yes, it’s true, outstanding mortgage balances topped $1trillion for the first time in Canada. That means $500billion of non-mortgage personal debt it out there. And that number bothers me more than the mortgage balance. Mortgage rates are at historical lows… home ownership and property investments should be encouraged. But borrowing for new TVs, cars, computers and other items, should be discouraged. We have to make a distinction. GOOD DEBT VS BAD DEBT. There is a difference. Let’s not group all this debt in one category…

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Steve Garganis, Editor

As an industry insider, Steve will share info that the BANKS don’t want you to know. Steve has appeared on TV’s Global Morning News, CBC’s “Our Toronto” and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.